Impact of Korea’s emissions trading scheme on publicly traded firms

Reducing fossil fuel energy consumption and greenhouse gas (GHG) emissions is vital to protecting life on the planet. Globally, emissions trading schemes are gaining traction as one way to curb emissions. However, the evidence of their effectiveness remains scarce. To address this gap, we examine the impact of Korea’s Emissions Trading Scheme (KETS), the first nationally mandated cap-and-trade program in East Asia to reduce GHG emissions, relative to its pre-existing command-and-control regulation called the Target Management System for Greenhouse Gases and Energy (TMS). Using panel data for publicly traded firms between 2011 and 2017, we apply a combination of panel data estimators and matching methods. We find that KETS did not significantly reduce emissions by firms but may have improved the aggregate efficiency in energy use in the energy and manufacturing sectors. Given the low levels of noncompliance with the first phase of the policy, it is likely that firms purchased permits and offsets or used previously banked permits to meet policy targets. Our work is one of the first efforts to understand the impact of KETS and the mechanisms underpinning its impact.